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Preston Company manufactures a product with a unit variable cost of $140 and a unit sales price of $264. Fixed manufacturing costs were $720,000 when 10,000 units were produced and sold. The company has a one-time opportunity to sell an additional 3,000 units at $210 each in a foreign market which would not affect its present sales. If the company has sufficient capacity to produce the additional units, acceptance of the special order would affect net income as follows: Select one: a. Income would increase by $156,000. b. Income would decrease by $162,000. c. Income would increase by $210,000. d. Income would increase by $6,000.

Answer :

Answer:

c. Income would increase by $210,000.

Explanation:

For computing the effect of net income, first we have to compute the net income which is shown below:

Net  income = Sales - variable cost - fixed cost

where,

Sales = Number of units × selling price per unit

         = 10,000 units × $264

         = $2,640,000

Variable cost = Number of units × variable cost per unit

                      = 10,000 units × $140

                      = $1,400,000

And, the fixed cost is $720,000

Now put these values to the above formula  

So, the value would equal to

= $2,640,000 - $1,400,000 - $720,000

= $520,000

If 3,000 additional units are sell

Then, increased in the net income would be

= Additional units × (New Selling price - variable cost)

= 3,000 units × ($210 - $140)

= 3,000 units × $70

= $210,000

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